Production Possibility Curve in Economics?
Production possibility curve (PPC) shows all possible combinations of two goods that a country can produce within a specified time period with the given state of technology when all its re-sources fully and efficiently employed.
Each point on the PPC represents maximum output of capital goods and consumer goods. The country must achieve full employment and productive efficiency in order to operate at any point on the PPC. However, if the economy were at point G, there would be unemployed resources and by bringing those resources into use the economy could move to any point on the PPC. Points outside the frontier such as H are unattainable with the current supplies of resources and technology.
The negative slope of the PPC can be viewed in terms of opportunity cost, which shows that obtaining more of one type of output requires having less of the other. A PPC is drawn on the assumptions that the quantity and productivity of resources remain fixed and the economy is employing all Production Possibility Curve available resources to produce goods and services at least cost. Though, economies may gain or lose re-sources over a period of time. Such changes could move the PPC of an economy to a new position. Figures below illustrate the outcome of the changes in the quantity and quality of resources.
An outward movement in an economy’s PPC’ could result from an increase in either the quantity or improvement in the productivity of its re-sources. Over a period of time if, for instance, the working population of the economy grows its PPC would shift outward as there would be more workers available to work. However, if the size of working population decreases the economy’s PPC moves inward.
These changes in working population could result either from varying size and com-position of population or the changing participation rate. Similarly, improvement in labor productivity resulting from new skills, improved education, training and better health increases the economy’s productive potential, hence shifts the PPC outward. On the contrary, a decline in labor productivity, say due to the worsening health conditions, could move its PPC inward. Position of an economy’s PPC also depends on its level of capital stock available. If, over a period of time, the economy manages to add more capital than the amount of capital becoming obsolete Production Possibility Curve PPC is likely to move outward. Normally, Equity Multiplier ratio is used as a yard stick to measure the efficiency and effectiveness of the capital invested.
However, if the economy fails to add more capital than the amount of capital that wears out its PPC could shift inward. These changes in the stock of capital result from the level of investment that depends on the sentiments of business people about future demand and profitability, tax regimes, the rate of growth of economy and interest rate.
Outward movement of PPC is not always the out-come of more capital rather Production Possibility Curve could also result from technical progress leading to higher productivity of machines and tools. Much of the investment in research and development aims at producing not just extra machines but superior machines. Thus if most of the investment is made in superior machines producing higher output from the given amount of resources then the outcome is an out-ward shift in PPC. Furthermore, if a country strikes luck and discovers vast new deposits of coal, oil or some other minerals Production Possibility Curve productive potential and hence the PPC would move outward.
On the contrary, depletion of some important natural resource, say due to excessive extraction, could shift the PPC in-ward. In particular cases, inward shift hi PPC could also result from the destruction of productive resources caused by natural calamities such as flood, draught, earthquake. Likewise a country suffering from political unrest or war with other countries may also have similar impact on Production Possibility Curve productive resources and PPC.
Thus Production Possibility Curve can be concluded that movement of an economy’s PPC over a period of time largely depends on the quantity and productivity of its available resources. Increasing quantities and or improvement in productivity of natural, manmade and human resources could result in an outward movement while a decrease in the quantity and productivity of these inputs may cause the PPC to shift inward.
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Author is an ACMA and frequently writes about accounting, finance and economics related topics. He runs his own blog at Easyaccounting101.com